ATO waves red flag on holiday rentals

Close on the heels of the June long weekend, the ATO has reminded taxpayers that it is paying close attention to rental properties located in popular holiday destinations around Australia. Assistant Commissioner Kath Anderson says that last year the ATO identified a large number of mistakes with deductions for rental properties, particularly with holiday homes.ATO waves red flag on holiday rentals

“We’ve noticed some people are claiming deductions for holiday homes even where the property is not genuinely being rented out, or genuinely available for rent,” Anderson says. “There’s no problem with people using their rental property for their holiday, but holiday home owners need to remember they can only claim tax deductions for expenses made during a period when the home is rented out or genuinely available for rent.”

She also points out that property owners need to understand that if they rent their property at a discount, or “mates rates”, they can only claim deductions equal to the amount of rent charged. “One taxpayer had to pay the ATO back over $45,000 in tax from deduction claims made for a holiday home they were renting out to friends and family below the market rate.”

Anderson says the ATO is focused on using data to identify errors. “Property owners should be aware that incorrect rental property claims will not go unnoticed. Technology enhancements and extensive use of data is allowing us to identify incorrect or suspicious claims,” she says. “We also have a good idea of the locations likely to be used for holiday homes.”

Anderson says that all rental property owners, particular those who rent out holiday homes, should always double-check their claims before lodging their tax return, and follow a couple of simple rules.

“First, make sure that you declare all rental income and only claim deductions for periods that the property is rented or was genuinely available for rent.”

“Secondly, make sure you have accurate records of expenses, and strong evidence of the property being rented or genuinely available for rent at market rates. Advertising through a real-estate agent is not always enough evidence to demonstrate that a property is genuinely available for rent.”

Claiming deductions for your holiday home?
Rental property owners generally know they can claim deductions on expenses for their investment property when it’s rented out. But even if it isn’t rented out, it is still possible to claim a deduction if the property is “genuinely available” for rent. The ATO suggests answering the following four questions can help determine this.

1/ How do you advertise your rental property?
Owners need to advertise in a way that maximises exposure to potential tenants, such as an online site. Advertising in ways that limits exposure to potential tenants, such as by word of mouth, means the property may not be genuinely available for rent.

2/ What location and condition is your rental property in?
It is important that the rental property is in a location, and maintained in a condition, that tenants will want. If the property is poorly cared for, or in a remote area, it is unlikely to be tenanted, and may not be classed as genuinely available for rent.

3/ Are there reasonable conditions for renting the property, and is the rent charged at market rates?
If an owner places unreasonable conditions that reduce the likelihood of the property being rented out, such as setting the rent above the market rate, the property may not be considered genuinely available for rent.

Likewise, if you, your family or your friends stay for free, your property will not meet the criteria during that time period. If the property is being tenanted at a discounted rate (“mates rates”) then the allowable deductions are limited to the amount of rent charged, not market rates.

4/ Are interested tenants accepted, unless there is a good reason not to?
If an owner refuses to rent out the property to interested potential tenants without a good reason, this indicates that they may not have a genuine intention to make income from the property and could be reserving it for private use. In this case, the property wouldn’t meet the criteria for being genuinely available for rent.

Podcast bonus
Travel expenses to care for rental property soon to be ineligible as a deduction.